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    Mr. Chairman, Ranking Member Waters and members of the committee, thank you for the opportunity to be here today. I am Alex Pollock, a senior fellow at the R Street Institute, and these are my personal views. I have spent more than four decades working in and on banking and housing finance, including 12 years as president and CEO of the Federal Home Loan Bank of Chicago and 11 years focused on financial policy issues at the American Enterprise Institute, before joining R Street last year. I have experienced and studied many financial crises and their political aftermaths, starting when the Federal Reserve caused the Credit Crunch of 1969 when I was a bank trainee.

    My discussion will focus on three key areas of the proposed CHOICE Act. All deal with essential issues and, in all three, the CHOICE Act would create major progress for the financial system, for constitutional government and for financing economic growth. These areas are accountability, capital and congressional governance of the administrative state.

    The CHOICE Act is long and complex, but there are a very large number of things to fix—like the Volcker Rule, among many others– in the even longer Dodd-Frank Act.

    A good summary of the real-world results of Dodd-Frank is supplied by the “Community Bank Agenda for Economic Growth” of the Independent Community Bankers of America. “Community banks,” it states, “need relief from suffocating regulatory mandates. The exponential growth of these mandates affects nearly every aspect of community banking. The very nature of the industry is shifting away from community investment and community building to paperwork, compliance and examination.” I think this observation is fair.

    The Community Bankers continue: “The new Congress has a unique opportunity to simplify, streamline and restructure.” So it does, and I am glad this committee is seizing the opportunity.

    In November 2016, Alan Greenspan remarked, “Dodd-Frank has been a—I wanted to say ‘catastrophe,’ but I’m looking for a stronger word.” Although the financial crisis and the accompanying recession had been over for a year when Dodd-Frank was enacted, in the wake of the crisis, as always, there was pressure to “do something” and the tendency to overreact was strong. Dodd-Frank’s something-to-do was to expand regulatory bureaucracy in every way its drafters could think of—it should be known as the Faith in Bureaucracy Act. This was in spite of the remarkably poor record of the government agencies, since they were important causes of, let alone having failed to avoid, the housing bubble and the bust. Naïve faith that government bureaucracies have superior knowledge of the financial future is a faith I do not share.

    Accountability of the Administrative State

    Accountability is a, perhaps the, central concept in every part of the government. To whom are regulatory agencies accountable? Who is or should be their boss? To whom is the Federal Reserve, a special kind of agency, accountable? Who is or should be its boss? To whom should the Consumer Financial Protection Bureau be accountable? Who should be its boss?

    The answer to all these questions is of course: the Congress. We should all agree on that. All these agencies of government, populated by unelected employees, must be accountable to the elected representatives of the people, who created them, can dissolve them and have to govern them in the meantime. All have to be part of the separation of powers and the system of checks and balances which is at the heart of our constitutional order. This also applies to the Federal Reserve. In spite of its endlessly repeated slogan that it must be “independent,” the Federal Reserve must equally be accountable.

    But accountability does not happen automatically: Congress has to assert itself to carry out its own duty for governance of the many agencies it has created and for its obligation to ensure that checks and balances actually operate.

    The CHOICE Act is an excellent example of the Congress asserting itself at last to clarify that regulatory agencies are derivative bodies accountable to the Congress, that they cannot be sovereign fiefdoms—not even the dictatorship of the CFPB, and not even the money-printing activities of the Federal Reserve.

    The most classic and still most important power of the legislature is the power of the purse. The CHOICE Act accordingly puts all the regulatory agencies, including the regulatory part of the Federal Reserve, under the democratic discipline of congressional appropriations. This notably would end the anti-constitutional direct grab from public funds which was originally granted to the CFPB—and which was designed precisely to evade the democratic power of the purse. It is sometimes objected that appropriations “inject politics” into these decisions. Well, of course! Democracy is political. Regulatory expansions are political, all pretense of technocracy notwithstanding.

    The CHOICE Act also requires of all financial regulatory agencies the core discipline of cost-benefit analysis. It provides that actions whose costs exceed their benefits should not be undertaken without special justification. That’s pretty logical and hard to argue with. Naturally, assessing the future costs and benefits of any action is subject to uncertainties—perhaps very large uncertainties. But this is no reason not to do the analysis—indeed, forthrightly to confront the uncertainties is essential.

    The CHOICE Act also requires an analysis after five years of how regulations actually turned out in terms of costs and benefits. This would reasonably lead—I hope it will—to scrapping the ones that didn’t work.

    To enhance and provide an overview of the regulatory agencies’ cost-benefit analyses, the CHOICE Act requires the formation of a Chief Economists Council, comprising the chief economist of each agency. This appeals to me, because it might help the views of the economists, who tend to care a lot about benefits versus costs, balance those of their lawyer colleagues, who may not.

    Further congressional governance of regulatory agencies is provided by the requirement that Congress approve major regulatory rules—those having an economic effect of $100 million or more. Congress would further have the authority to disapprove minor rules if it chooses by joint resolution. This strikes me as a very effective way of reminding everybody involved, including the Congress itself, who actually is the boss and who has the final responsibility.

    Taken together, these provisions are major increases in the accountability of regulatory agencies to the Congress and ultimately to the people. They are very significant steps forward in the governance of the administrative state and bringing it under better constitutional control.

    Accountability of the Federal Reserve

    A word more on the Federal Reserve in particular, since the CHOICE Act devotes a title to “Fed Oversight Reform and Modernization” (FORM), which includes improving its governance by Congress. In a 1964 report, “The Federal Reserve after Fifty Years,” the Domestic Finance Subcommittee of the ancestor of this committee, then called the House Committee on Banking and Currency, disapprovingly reviewed the idea that the Federal Reserve should be “independent.” This was in a House and committee controlled by the Democratic Party. The report has this to say:

    • “An independent central bank is essentially undemocratic.”
    • “Americans have been against ideas and institutions which smack of government by philosopher kings.”
    • “To the extent that the [Federal Reserve] Board operates autonomously, it would seem to run counter to another principle of our constitutional order—that of the accountability of power.”

    In my view, all these points are correct.

    The president of the New York Federal Reserve Bank testified to the 1964 committee: “Obviously, the Congress which set us up has the authority and should review our actions at any time they want to, and in any way they want to.” That is entirely correct, too.

    Under the CHOICE Act, such reviews would happen at least quarterly. I would like to suggest an additional requirement for these reviews. I believe that the Federal Reserve should be required to produce a Savers Impact Statement, quantifying and discussing the effects of its monetary policies on savings and savers.

    The CHOICE Act requires of new regulatory rules that they provide “an assessment of how the burden imposed…will be distributed among market participants.” This good idea should by analogy be applied to burdens imposed on savers by monetary actions. By my estimate, the Federal Reserve has taken since 2008 more than $2 trillion from savers and given it to borrowers. The Federal Reserve may defend its sacrifice of the savers as a necessary evil—but it ought to openly and clearly quantify the effects and discuss the economic and social implications with the Congress.

    Accountability of Banks

    Let me turn to accountability in banking, under two themes: providing sufficient equity to capitalize your own risks; and bearing the risk you create—otherwise known as “skin in the game.”

    The best-known provision of the CHOICE Act is to allow banks the very sensible choice of having substantial equity capital—to be specific, a 10 percent or more tangible leverage capital ratio—in exchange for reduction in onerous and intrusive regulation. Such regulation becomes less and less justifiable as the capital rises. As I testified last July, this is a rational and fundamental trade-off: More capital, less intrusive regulation. Want to run with less capital and thus push more of your risk onto the government? You get more regulation.

    It is impossible to argue against the principle that there is some level of equity capital at which this trade-off makes sense for everybody—some level of capital at which everyone, even habitual lovers of bureaucracy, would agree that the Dodd-Frank burdens are superfluous, with costs higher than their benefits.

    But exactly what that level is, can be and is, disputed. Because banking markets are so shot through with government guarantees and distortions, there is no clear market test. All answers are to some degree theoretical, and the estimates vary—some think the number is less than 10 percent leverage capital—for example, economist William Cline finds that optimal bank leverage capital is 7 percent—or 8 percent to be conservative. Some think it is more—15 percent has been suggested more than once. The International Monetary Fund came up with a desired risk-based capital range which they concluded was “consistent with 9.5 percent” leverage capital—that’s pretty close to 10 percent. Distinguished banking scholar Charles Calomiris suggested “roughly 10 percent.” My opinion is that the fact that no one knows the exactly right answer should not stop us from moving in the right direction.

    All in all, it seems to me that the 10 percent tangible leverage capital ratio, conservatively calculated, as proposed in the CHOICE Act is a fair and workable level to attain “qualifying banking organization” status, in other words, the more capital-less onerous regulation trade-off. The ratio must be maintained over time, with a one-year remediation period if a bank falls short, and with immediate termination of the qualifying status if its leverage capital ratio ever falls below 6 percent—a ratio sometimes considered very good. All this seems quite reasonable to me.

    The CHOICE Act mandates a study of the possible regulatory use of the “non-performing asset coverage ratio,” which is similar to the “Texas ratio” from the 1980s. The point is to compare the level of delinquent and nonaccrual assets to the available loan loss reserves and capital, as a way of estimating how real the book equity is. This study is a good idea.

    To be fully accountable for the credit risk of your loans, you can keep them on your own balance sheet. This is 100 percent skin in the game. One of the true (not new, but true) lessons of the housing bubble was that loans made with 0 percent skin in the game are much more likely to cause trouble. So Dodd-Frank made up a bunch of rules to control the origination of mortgages which feed into a zero skin in the game system. These rules are irrelevant to banks that keep their own loans.

    The CHOICE Act therefore gives relief to banks holding mortgage loans in portfolio from regulations which arose from problems of subprime securitization, problems alien to the risk structure and incentives of the portfolio lender.

    Accountability for Deals with Foreign Regulators

    A challenging issue in the governance of the administrative state are deals that the Treasury and the Federal Reserve are alleged to have made with foreign regulators and central bankers, is in the context of their participation in the international Financial Stability Board (FSB). These deals have been made, the suggestion is, outside of the American legal process, and then imported to the United States.

    Were there any such deals, or were there merely discussions?

    We know that the FSB has publicly stated that it will review countries for “the implementation and effectiveness of regulatory, supervisory or other financial sector standard and policies as agreed by the FSB.” As agreed by the FSB?  Does that mean a country, specifically the United States, is supposed to be bound by deals made in this committee?  Did the American participants in these meetings feel personally committed to implement some agreements?

    We also know that there is a letter that would shine light on this question: a September 2014 letter from Mark Carney, the governor of the Bank of England and chairman of the FSB, to then-Treasury Secretary Lew. This letter allegedly reveals the international discussions about American companies, including it is said, whether Berkshire Hathaway should be designated a systemically important insurer (an idea not politically popular with the Obama administration). A Freedom of Information Act request for the letter has previously been denied by the Treasury, which admits, however, that it exists.

    I believe that Congress should immediately request a copy of this letter as part of its consideration of the “International Processes” subtitle of the CHOICE Act. While at it, Congress should request any other correspondence regarding possible agreements within the FSB.

    The international subtitle rightly requires regulatory agencies and the Treasury to tell the Congress what subjects they are addressing in such meetings and whether any agreements have been made.

    Accountability for Emerging Financial System Risks

    The CHOICE Act makes a number of positive changes to the structure and functions of the Financial Stability Oversight Council (FSOC). Here I would like to suggest a possible addition.

    I believe the responsibility for reporting to Congress on identified emerging financial system risks should be clearly assigned to the secretary of the Treasury. As the Chairman of FSOC, the secretary is in charge of whatever discussions are required with regulatory agencies, the Federal Reserve or foreign governments.

    Forecasts of the unknowable financial future are hard to get right, needless to say, but I believe a unified, single assignment of responsibility for communications with Congress of the best available risk assessments would be a good idea.

    Thank you again for the chance to share these views.


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    WASHINGTON (April 26, 2017) – The Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs Act, better known as the Financial CHOICE Act, would represent major progress for the financial system, for constitutional government and for financing economic growth, R Street Distinguished Senior Fellow Alex J. Pollock testified today to the House Financial Services Committee.

    Sponsored by Financial Services Committee Chairman Jeb Hensarling, R-Texas, the bill is best known for its provision to allow banks with a tangible leverage-capital ratio of 10 percent or more to see reductions in onerous and intrusive regulations imposed by the Dodd-Frank Act. Pollock praised that provision, noting that many aspects of the law—passed in the wake of 2008 financial crisis—represented legislative overreactions that expanded regulatory bureaucracy in harmful ways.

    “This was in spite of the remarkably poor record of the government agencies, since they were important causes of, let alone having failed to avoid, the housing bubble and the bust,” Pollock said. “Naïve faith that government bureaucracies have superior knowledge of the financial future is a faith I do not share.”

    Pollock also praised aspects of the CHOICE Act designed to improve regulatory transparency and accountability, including subjecting all regulatory agencies to the congressional appropriations process; requiring agencies to conduct cost-benefit analyses of promulgated rules, which would themselves be subject to review by a newly formed Chief Economists Council; and subjecting the Federal Reserve to quarterly reviews by Congress.

    “I would like to suggest an additional requirement for these reviews. I believe that the Federal Reserve should be required to produce a Savers Impact Statement, quantifying and discussing the effects of its monetary policies on savings and savers,” Pollock said.

    Pollock also praised elements of the bill designed to bring greater transparency to the Financial Stability Oversight Council. He proposed the bill should go further by requiring the secretary of the Treasury, who serves as the council’s chair, to deliver regular reports to Congress on emerging risks to the financial system identified by FSOC.

    “Forecasts of the unknowable financial future are hard to get right, needless to say, but I believe a unified, single assignment of responsibility for communications with Congress of the best available risk assessments would be a good idea,” Pollock said.

    R Street is a nonprofit, nonpartisan public policy research organization whose mission is to promote free markets and limited, effective government. It has headquarters in Washington, D.C. and five regional offices across the country. Its website is www.rstreet.org.


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    Many of us know what a “seven-year itch” is. Between the famous Marilyn Monroe movie of the 1950s and the legendary Roseanne Cash song of the 1980s, it is a fairly well-understood turn of phrase.

    Congress finally got around this past week to scratching one the most economically painful and fairly literal “seven-year itches” by starting the process to roll back the Dodd-Frank Act, which will turn seven this July.

    The Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) Act—currently before the House Financial Services Committee—has many bright ideas and could serve as a great replacement for the burdensome Dodd-Frank bill of the Obama years. However, in the midst of this happy occasion, the American consumer needs to pay close attention, because Congress may in the end do something stupid.

    A behind-the-scenes effort is underway let a Dodd-Frank provision commonly referred to as the “Durbin amendment” remain in the law. If you have a checking account, you should not let Congress keep this law on the books. Chairman Jeb Hensarling, R-Texas, took a strong stand in calling for repeal of the Durbin amendment as part of the CHOICE Act, and the committee should follow his lead by keeping that repeal in the final mark-up.

    The Durbin amendment affects literally anyone with a checking account and a debit card. It requires the Federal Reserve to impose artificial government price controls to cap what banks charge to retailers for what are referred to as “interchange fees,” which banks use to pay for the security they provide for customers’ accounts. The cap is set far lower than it would be in a free market, creating a host of unintended consequences.

    Before the government interference, banks and credit unions would use these fees to cover more than just security. They would use the revenues to offer perks to their customers, like free checking or point rewards system similar to what we see with traditional credit cards. Studies have shown these perks are worth millions in value to customers. But thanks to the Durbin amendment, banks have been forced to scale back their perks dramatically. The end result has hurt consumers, particularly those—like lower-income families or younger customers—who rely heavily on their checking accounts to conduct financial transactions.

    While checking-account customers lost out, retailers (especially big-box retailers) made out like bandits. In 2010, the major retailers’ lobby sold Congress on limiting these transaction fees, promising they would pass along the savings to their customers. As of today, there is no evidence that has ever happened. In fact, an analysis of Federal Reserve data shows retailers have made off with more than $42 billion in foregone interchange fees over the last seven years. Shoppers have seen virtually no decrease in prices, even as they watched as many of their banking benefits disappear.

    As the Financial Services Committee wraps up its hearings on the CHOICE Act, it’s important for the American people not to sit by idly. The Durbin amendment was sold in 2010 as protection for the American people, but the data prove the only protection it offers is to the major retailers’ profit margins. The House Financial Services Committee should strive to repeal the Durbin amendment, as should the full House when it hits the floor.


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    This week, the House Financial Services Committee passed Chairman Jeb Hensarling’s Financial CHOICE Act. Most of the public discussion of this bill is about its changes in banking regulations, but from a constitutional point of view, even more important are the sections that deal with the accountability of regulatory agencies and the governance of the administrative state.

    Accountability is a central concept in every part of the government. To whom are regulatory agencies accountable? Who is or should be their boss? To whom is the Federal Reserve, a special kind of agency, accountable? Who is or should be its boss? To whom should the Consumer Financial Protection Bureau (CFPB) be accountable? Who should be its boss?

    The correct answer to these questions, and the answer given by the CHOICE Act, is the Congress. Upon reflection, we should all agree on that. All these agencies of government, populated by unelected employees with their own ideologies, agendas, and will to power — as vividly demonstrated by the CFPB — must be accountable to the elected representatives of the people, who created them, can dissolve them, and have to govern them in the meantime. All have to be part of the separation of powers and the system of checks and balances that is at the heart of our constitutional order.

    But accountability does not happen automatically: Congress has to assert itself to carry out its own duty for governance of the many agencies it has created and its obligation to ensure that checks and balances actually operate.

    The theme of the Dodd-Frank Act was the opposite: to expand and set loose regulatory bureaucracy in every way its drafters could think of. It should be called the Faith in Bureaucracy Act.

    In the CHOICE Act, Congress is asserting itself at last to clarify that regulatory agencies are derivative bodies accountable to the Congress, that they cannot be sovereign fiefdoms — not even the Dictatorship of the CFPB, and not even the money-printing activities of the Federal Reserve.

    The most classic and still most important power of the legislature is the power of the purse. The CHOICE Act accordingly puts all the regulatory agencies, including the regulatory part of the Federal Reserve, under the democratic discipline of Congressional appropriations.

    This notably would end the anti-constitutional direct grab from public funds which was originally granted to the CFPB — which was designed precisely to evade the democratic power of the purse. It is sometimes objected that appropriations “inject politics” into these decisions. Well, of course! Democracy is political. Expansions of regulatory power are political, all pretense of technocracy notwithstanding.

    The CHOICE Act also requires of all financial regulatory agencies the core discipline of cost-benefit analysis. It provides that actions whose costs exceed their benefits should not be undertaken without special justification. That’s pretty logical and hard to argue with. Naturally, assessing the future costs and benefits of any action is subject to uncertainties — perhaps very large uncertainties. But this is no reason to avoid the analysis — indeed, forthrightly confronting the uncertainties is essential.

    The CHOICE Act also requires an analysis after five years of how regulations actually turned out in terms of costs and benefits. This would reasonably lead — we should all hope it will — to scrapping the ones that didn’t work.

    Further Congressional governance of regulatory agencies is provided by the requirement that Congress approve major regulatory rules — those having an economic effect of $100 million or more. Congress would further have the authority to disapprove minor rules if it chooses by joint resolution. This is a very effective way of reminding everybody involved, including the Congress itself, who actually is the boss and who has the final responsibility.

    On the Federal Reserve in particular, the CHOICE Act devotes a title to “Fed Oversight Reform and Modernization,” which includes improving its accountability.

    “Obviously, the Congress which set us up has the authority and should review our actions at any time they want to, and in any way they want to,” once succinctly testified a president of the New York Fed. Under the CHOICE Act, such reviews would happen at least quarterly.

    In these reviews, I recommend that the Federal Reserve should in addition be required to produce a Savers Impact Statement, quantifying and discussing the effects of its monetary policies on savings and savers.

    The CHOICE Act requires of new regulatory rules that they provide “an assessment of how the burden imposed … will be distributed among market participants.” This good idea should by analogy be applied to burdens imposed on savers by monetary actions.

    By my estimate, the Federal Reserve has taken since 2008 over $2 trillion from savers and given it to borrowers. The Federal Reserve may want to defend its sacrifice of the savers as a necessary evil — but it ought to openly and clearly quantify the effects and discuss the economic and social implications with the Congress.

    In sum, the CHOICE Act represents major improvements in the accountability of government agencies to the Congress and ultimately to the people. These are very significant steps forward in the governance of the administrative state to bring it under better constitutional control.


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    The Consumer Financial Protection Bureau—the brainchild of then-Harvard law professor Elizabeth Warren  created in the wake of the 2008 financial crisis as part of the Dodd-Frank Act—may finally gain some basic requirements of accountability and transparency, as Congress moves forward with a significant rewrite of Dodd-Frank rules.

    The law tasked the CFPB with supervising depository institutions—banks, thrifts and credit unions—with more than $10 billion in assets. It also has supervisory powers over some other financial services, including mortgage brokers, mortgage originators and servicers, student loan companies and payday lenders. Established as an independent executive agency—with a single director who can only be dismissed for cause and with funding coming automatically from the Federal Reserve, rather than congressional appropriations—the CFPB’s structure has always been constitutionally suspect.

    Indeed, the courts may intervene even before Congress has the opportunity. Last fall, a three-judge panel of the D.C. Circuit Court of Appeals struck down the CFPB’s unique arrangement on separation-of-powers grounds in PHH Corp. v. CFPB. More recently, the D.C. Circuit granted the bureau’s request to hear the caseen banc, which will put it before all 10 of the circuit’s judges in a hearing scheduled for later this month.

    Regardless how that case turns out, Congress is moving forward on the Financial CHOICE Act, sponsored by House Financial Services Committee Chairman Jeb Hensarling (R-Texas). The CHOICE Act, which cleared Hensarling’s committee last week, would subject CFPB to the congressional appropriations process, reasserting the democratic accountability the agency has lacked since its inception. It also would change the bureau’s mandate to both uphold consumer protection and ensure competitive markets by charging the CFPB with performing cost-benefit analyses for the rules it promulgates.

    As my R Street Institute colleague Alex Pollock noted in his recent testimony before the Financial Services Committee, the bill “would end the anti-constitutional direct grab from public funds which was originally granted to the CFPB—and which was designed precisely to evade the democratic power of the purse.”

    By focusing its energies on enforcing consumer protection statutes and ensuring competitive markets, the Choice Act would streamline the Bureau’s functions. It also would reverse the original mistake of seizing power from the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and state financial services regulators, who already provided adequate supervision of these areas.

    The CHOICE Act would improve accountability by restructuring the bureau as an executive branch agency and making its director removable by the president at will. But as Congress moves forward with the legislation, it should consider slight alterations that would take a longer view. An earlier version of the CHOICE Act Hensarling introduced in 2016 would have converted the CFPB’s leadership structure into a bipartisan commission with staggered commissioner terms, similar to what you see with the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Trade Commission and a host of other independent agencies of the federal government.

    This would represent a positive change. Administrations come and go, and the next one easily could return the overall regulatory environment to a heavy-handed approach. A bipartisan commission would give both parties a voice in bureau decisions. A glance at Federal Communications Commission Chairman Ajit Pai’s dissents when he was a commissioner during the Obama administration demonstrates how valuable even minority opinions can be in helping to shape board decisions and highlighting when the majority reaches too far.

    Since its inception, CFPB has evaded democratic oversight from either Congress or the president. The CHOICE Act would rectify this by making the bureau consistent with the Constitution’s demands and our democratic norms.


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    The following post was co-authored by R Street Outreach Manager Clark Packard.


    House Financial Services Committee Chairman Jeb Hensarling, R-Texas, has done the yeoman’s work of putting together a host of fundamantal conservative reforms in the CHOICE Act. Although repeal of the Durbin amendment would have been a positive, pro-market reform, Congress should pass the bill even if this repeal is not included.

    The most important provision of the bill allows banks the very sensible choice of maintaining substantial equity capital in exchange for a reduction in onerous and intrusive regulation. This provision puts before banks a reasonable and fundamental trade-off: more capital, less intrusive regulation. This is reason enough to support the CHOICE Act. Its numerous other reforms also include improved constitutional governance of administrative agencies, which are also a key reason to support the bill.

    Accountability of banks

    The 10 percent tangible leverage capital ratio, conservatively calculated, as proposed in the CHOICE Act, is a fair and workable level.

    A key lesson of the housing bubble was that mortgage loans made with 0 percent skin in the game are much more likely to cause trouble. To be fully accountable for the credit risk of its loans, a bank can keep them on its own balance sheet. This is 100 percent skin in the game. The CHOICE Act rightly gives relief to banks holding mortgage loans in portfolio from regulations that try to address problems of a zero skin in the game model – problems irrelevant to the incentives of the portfolio lender.

    Accountability of regulatory agencies

    The CHOICE Act is Congress asserting itself to clarify that regulatory agencies are derivative bodies accountable to the legislative branch. They cannot be sovereign fiefdoms, not even the dictatorship of the Consumer Financial Protection Bureau. The most classic and still most important power of the legislature is the power of the purse.  The CHOICE Act accordingly puts all the financial regulatory agencies under the democratic discipline of congressional appropriations. This notably would end the anti-constitutional direct grab from public funds that was granted to the CFPB precisely to evade the democratic power of the purse.

    The CHOICE Act also requires of all financial regulatory agencies the core discipline of cost-benefit analysis. Overall, this represents very significant progress in the governance of the administrative state and brings it under better constitutional control.

    Accountability of the Federal Reserve

    The CHOICE Act includes the text of The Fed Oversight Reform and Modernization Act, which improves governance of the Federal Reserve by Congress. As a former president of the New York Federal Reserve Bank once testified to the House Committee on Banking and Currency: “Obviously, the Congress which set us up has the authority and should review our actions at any time they want to, and in any way they want to.” That is entirely correct. Under the CHOICE Act, such reviews would happen at least quarterly. These reviews should include having the Fed quantify and discuss the effects of its monetary policies on savings and savers.

    Reform for community banks

    A good summary of the results of the Dodd-Frank Act is supplied by the Independent Community Bankers of America’s “Community Bank Agenda for Economic Growth.” “Community banks,” it states, “need relief from suffocating regulatory mandates. The exponential growth of these mandates affects nearly every aspect of community banking. The very nature of the industry is shifting away from community investment and community building to paperwork, compliance and examination,” and “the new Congress has a unique opportunity to simplify, streamline and restructure.”

    So it does. The House of Representatives should pass the CHOICE Act.


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    The Banking Act of 1933 was passed in an environment of crisis. In March of that year, all of the nation’s financial institutions were closed in the so-called “bank holiday,” which followed widespread bank runs over the prior months.

    Sen. Carter Glass, D-Va., a chief author of the bill and senior member of the Committee on Banking and Currency, was determined not to “let a good crisis go to waste.” Though he did not like the proposals from Chairman Henry Steagall, D-Ala., for federal deposit insurance, he agreed to support it on the condition that the legislation include Glass’ own pet idea that commercial banking be separated from much of the securities business.

    It was poor policy from the start, but it took more than six decades to get rid of it. Now some political voices want to revive it. Financial ideas — like financial markets — have a cycle. Reviving Glass-Steagall would be an action with substantial costs, but no benefits. Its primary appeal seems to be as a political slogan.

    Not having Glass-Steagall had nothing to do with the housing bubble or the resulting financial crisis of 2007 to 2009, except that being able to sell failing investment banks to big commercial banks was a major advantage for the regulators. And not having the law, in fact, had nothing to do with the crises of Glass’ own time, including the banking panic of 1932 to 1933 and the Great Depression.

    Meanwhile, having Glass-Steagall in force did not prevent the huge, multiple financial busts of 1982 to 1992, which caused more than 2,800 U.S. financial institution failures, or the series of international financial crises of the 1990s.

    While Glass-Steagall was in place, it required commercial banks to act, under Federal Reserve direction, as “the Fed’s assistant lenders of last resort,” whenever the Fed wanted to support floundering securities firms. This happened in the 1970 collapse of the commercial paper market, which followed the bankruptcy of the giant Penn Central Railroad, and in the “Black Monday” collapse of the stock market in 1987.

    The fundamental problem of banking is always, in the memorable phrase of great banking theorist Walter Bagehot, “smallness of capital.” Or, to put the same concept in other words, the problem is “bigness of leverage.” So-called “traditional” commercial banking is, in fact, a very risky business, because making loans on a highly leveraged basis is very risky, especially real estate loans. All of financial history is witness to this.

    Moreover, making investments in securities — that is, buying securities, as opposed to being in the securities business — has always been a part of traditional commercial banking. Indeed, it needs to be, for a highly leveraged balance sheet with all loans and no securities would be extremely risky and entirely unacceptable to any prudent banker or regulator.

    You can make bad loans and you can buy bad investments, as many subprime mortgage-backed securities turned out to be. As a traditional commercial bank, you could make bad investments in the preferred stock of Fannie Mae and Freddie Mac, which created large losses for numerous banks and sank some of them.

    Our neighbors to the north in Canada have a banking system that is generally viewed as one of the most stable, if not the most stable, in the world. The Canadian banking system certainly has a far better historical record than does that of the United States.

    There is no Glass-Steagall in Canada: all the large Canadian banks combine commercial banking and investment banking, as well as other financial businesses, and the Canadian banking system has done very well. Canada thus represents a great counterexample for Glass-Steagall enthusiasts to ponder.

    In Canada, there is now a serious question of a housing bubble. If this does give the Canadian banks problems, it will be entirely because of their “traditional” banking business of making mortgage loans — the vast majority of mortgages in Canada are kept on banks’ own balance sheets. If the bubble bursts, they will be glad of the diversification provided by their investment banking operations.

    To really make banks safer, far more pertinent than reinstating Glass-Steagall, would be to limit real estate lending. Real estate credit flowing into real estate speculation is the biggest cause of most banking disasters and financial crises. Those longing to bring back their grandfather’s Glass-Steagall should contemplate instead the original National Banking Act, which prohibited real estate loans altogether for “traditional” banking.

    Among his other ideas, Glass was a strong proponent of the “real bills” doctrine, which held that commercial banks should focus on short-term, self-liquidating loans to finance commercial trade. His views were reflected in the Federal Reserve Act, which, as Allan Meltzer has described it, had “injunctions against the use of credit for speculation” and an “emphasis on discounting real bills.” This approach which does not leave a lot of room for real estate lending.

    If today’s lawmakers want to be true to Sen. Glass, they could more strictly limit the risks real estate loans create, especially in a boom, and logically call that “a 21st century Glass-Steagall.”


    Image by Ionut Catalin Parvu


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    Congress originally passed the Military Lending Act in response to scandalous stories of predatory payday lenders who would set up shop around military bases and charge our servicemen and women sky-high interest rates that reached upward of 400 percent.

    A decade later, this well-intentioned law, which was signed by former President George W. Bush as part of the 2007 Defense Authorization Act, is having some unintended consequences and in some cases making it harder for service members to obtain secure financial products even from traditional banks and credit unions.

    Although the rules initially applied only to high-interest payday loans, vehicle title loans and income tax refund anticipation loans issued to covered borrowers, the Defense Department later expanded its regulations in 2015 to cover a broad range of lenders and credit products, limiting the interest that any lender could charge for extending “consumer credit” to active-duty military borrowers and their families at an annual percentage rate of 36 percent.

    Rules that took effect late last year cover essentially all consumer credit products except home and auto loans. As of Oct. 3 of this year, credit cards will fall under the regulation, as well.

    While the rules were intended to protect military families, such limitations make it harder for some to obtain short-term, small-dollar loans affordably. A survey completed in May that looked at National Credit Union Administration call data found that 86 percent of military credit unions saw their portfolios of payday alternative loans shrink over the course of 2016, compared to just 47 percent of nonmilitary credit unions. Under rules established by the NCUA, payday alternative loans, or PALs, have a maximum interest rate of 28 percent and a maximum term of six months. The data show that among all credit unions, PALs grew by 9.5 percent in 2016 to $129.5 million, although they are still dwarfed by the $50 billion payday lending industry.

    But the effect of the MLA extends beyond just PALs. Essentially, lenders are less likely to write nearly any product for military borrowers with low credit scores or financial difficulties in their past. The credit union survey show that 11 percent of military credit unions have eliminated share-secured loans, while others have discontinued indirect car lending, unsecured lines of credit, overdraft lines of credit or credit cards.

    Indeed, while the rules require that lenders check a borrower’s military status against the rolls kept by the Defense Manpower Data Center, there is evidence that some borrowers have gone so far as to deny that they were active duty on loan applications, just to gain quick access to higher-interest loans. Ironically, rules intended to protect military families from abusive lending practices are driving some away from responsible financial institutions and back into the arms of the predatory lenders.

    In late June, the major trade associations representing the lending industry — including the Credit Union National Association, the American Bankers Association, the Independent Community Bankers of America, the National Association of Federally-Insured Credit Unions and others — wrote to the Defense Department seeking more clarity on a number of the rule’s provisions, as well as places where it appears to be inconsistent with the department’s interpretive guidance. The lenders also seek a one-year delay before the MLA is applied to credit card products, which could further constrain military families’ access to credit.

    That would represent a good start. No one questions that service members enjoy better protections today than in the days when many were vulnerable to deceptive lending practices that could charge APRs in excess of 300 percent. But in a time when nearly 60 percent of U.S. households couldn’t manage an unexpected $500 expense, it’s also important not to kill those products that would best serve military families who find themselves in a jam.

    They risked their lives to protect this country. The country owes it to them to protect their financial security, in turn.


    Image by Billion Photos


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    The following op-ed was co-authored by Rafael A. Mangual, who manages legal policy projects at the Manhattan Institute for Policy Research.


    The Consumer Financial Protection Bureau earlier this month finalized a rule forbidding financial services firms from including mandatory arbitration clauses in contracts with consumers. The rule is both bad for consumers and illustrative of the need for accountability in Washington, where unelected bureaucrats wield too much power with too little oversight.

    Created by 2010’s Dodd-Frank Act, the CFPB is not only an independent agency but is essentially accountable to no one. Former President Barack Obama’s choice for CFPB director — Richard Cordray, the former Ohio attorney general — remains in the post because the law requires that he is removable by the president only “for cause.” It happens that a panel of the D.C. Circuit struck down that arrangement last year as unconstitutional, but the case currently is on appeal to the full circuit.

    It isn’t just the White House that faces limits in changing the agency’s direction. The CFPB operates wholly outside the normal congressional appropriations process, and is instead funded by money transferred from the Federal Reserve. This prevents Congress from using its constitutional power of the purse to exercise oversight over the agency, which the D.C. Circuit called “extra icing on an unconstitutional cake already frosted.”

    In promulgating the arbitration clause rule, the CFPB is using the tremendous lawmaking powers delegated to it under Dodd-Frank to take the side of the plaintiffs’ bar, who claim that allowing consumer contracts to call for arbitration, rather than litigation, to resolve disputes serves to deny consumers their “day in court.” While mandatory arbitration clauses do indeed curb litigation, the actual process of arbitration is far from the rigged system its motivated critics portray.

    2009 study by the Searle Civil Justice Institute found consumers actually are more likely to be awarded relief in arbitration than in court. While supporters of the rule contend that arbitration is rigged against consumers, a look at the CFPB’s own study in support of its rule found that 87% of class action lawsuits resulted in zero benefits to the plaintiffs.

    Even when consumers are lucky enough to be part of a successful class action, the average individual payment is only about $32. Interestingly, the lawyers in such suits raked in $425 million in fees between 2010 and 2013, according to Forbes‘ Daniel Fisher. Of the arbitrations reviewed by the CFPB in which consumers were victorious, the average individual payment was $5,389.

    To be sure, not all customers follow through to arbitration. But no individual customer with a $5,000 claim can get a lawyer to press his case. And arbitration is merely a backstop since sellers of financial products already have a strong incentive to refund wrongfully imposed fees when they receive a customer complaint.

    A Mercatus Center study reviewed evidence from one bank that, in 2014, “offered refunds in about 68% of cases in which a consumer complained, resulting in refunds of over $2.275 million.” The evidentiary record in AT&T v. Concepcion, a 2010 Supreme Court ruling which supported enforcement of mandatory arbitration clauses, found that the company in that case responded to consumer complaints by refunding more than $1.3 billion in a single year.

    Anti-arbitration activists often respond to this hard evidence by arguing that class-action lawsuits are more likely to result in broad changes to corporate behavior than individual dispute resolution. While this may be true, we traditionally have deferred to the political process, not litigation by profit-seeking plaintiffs’ attorneys, as the proper way to decide how best to regulate corporate conduct.

    In this case, companies will doubtless respond to the CFPB rule by changing their practices and eliminating generous arbitration provisions, since they cannot stop expensive class-action lawsuits. But this is hardly a boon for consumers. A 2016 Manhattan Institute study found that the CFPB’s arbitration rule would likely result in higher upfront fees and minimum balance requirements being imposed on the very consumers the agency purports to be helping — a result that already appears to have come to pass.

    Despite creating an unaccountable entity in the CFPB and vesting it with lawmaking powers, Congress still has the tools to fix this problem. Under the Congressional Review Act, Congress can repeal any agency action within the last 60 legislative days under an expedited process that avoids the Senate filibuster. This arbitration rule would seem to be an obvious candidate for CRA repeal, but concerns are arising that Congress is so overwhelmed with health care and other legislative priorities that it might not have the floor time to do so.

    Unfortunately, the CFPB arbitration episode is not a one-off problem. Over the past century, Congress has delegated more and more of its power to unaccountable agencies, while also failing to exercise proper oversight. Congress has lacked both the capacity and the will to reassert its role as the country’s first branch. Until it does, situations like this could just be the tip of the iceberg.


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